Medsider: Learn from Medtech and Healthtech Founders and CEOs - What Medtech Venture Capitalists Want to See in Your Startup

Episode Date: November 10, 2020

This interview is part of a throwback mini-series to several years ago when I chatted with Kevin Bitterman, who at the time, was with Polaris Venture Partners. He’s now a partner with Atlas Venture, but the lessons you can glean from this discussion still hold true. Namely:What medtech venture capitalists like to see in a startup and how these early-stage medical device companies can best position themselves for success. What requirements would make for an attractive IPO opportunity?What questions should medtech startups have already answered before approaching a potential buyer?And in terms of a potential exit, what is more, important for a medical device startup – clinical data or commercial traction?See more...

Welcome to MedSider, where you can learn from a mix of experienced medical device and medtech experts. These proven mentors will show you how to master the med tech space on your own terms without going to school. Now, here's your host, Scott Nelson. Is MedTech Venture Capital like a rare, nearly extinct animal? You know, similar to one of those odd but interesting animals we've all seen on the Discovery Channel, like the passenger pigeon. In fact, as recently as 200 years ago, passenger pigeons weren't anywhere near extinction. They were actually the most common bird in North America.

So what's the parallel between the passenger pigeon and MedTech Venture Capital? Answer, scarcity. MedTech VCs are becoming less and less interested in healthcare because of diminishing returns. With that said, will MedTech Venture Capital eventually see the same fate as the passenger pigeon? Or is well-known VC Terry McGuire-Rite in declaring that Darwin was an optimist? To help answer those questions and a host of others, enter Kevin Bitterman, principal at Polaris Venture Partners. In this interview, we learn what MedTech venture capitalists like to see in a startup, and

how these early stage medical device companies can best position themselves for success. Here are some of the points we're going to cover. Will the IPO market for MedTech companies ever open up again? Also, what requirements would make for an attractive IPO candidate? Where do large medical device companies see the greatest opportunity for growth? What questions should MedTech startups have already answered before approaching a potential buyer? In terms of a potential exit, what is more important for a medical device startup?

Clinical data or commercialization? Kevin's lasting advice for early stage medical device companies. Of course, we'll cover even more interesting insights in this interview. But before we dig in, you need to listen to these brief messages from our sponsors. And by the way, if you're interested in becoming a Medsider sponsor, go to Medsider.com forward slash sponsor. Again, that's medsider.com forward slash sponsor. Now listen up. The simple reality is that a conference is a huge opportunity to build relationships with extraordinary people. People who might have a significant impact on your professional or personal success. To make sure that you maximize

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Also, if you like the podcast, don't forget to rate it. That really helps us out. Okay. For you ambitious med tech and medical device doers, here's your program. Hello, hello, everyone. It's Scott Nelson, and welcome to another edition of MedCide. the program where you could advance your medical device or med tech career on your own terms without going to school. And on today's program, we've got Kevin Bitterman, who's a principal at Polaris Ventures.

He's been with Polaris since 2004. He obtained his Ph.D. at Harvard Medical School, earned his BA with honors from Rutgers with a major in biological sciences and a minor in philosophy. So thanks a ton for coming on the program today. Kevin, really appreciate it. Thanks, Scott. Glad to be here. All right, so let's first start out with the one big question, as I mentioned in our kind of our pre-interview talk, is presuming, making the assumption that the IPO market is pretty dried up. What do med tech startups need to do in order to see an M&A exit, as that's the most likely option probably moving forward, at least for the foreseeable future?

So that's the big question that we're going to try to answer in this interview. But before we go there, do you agree with that assumption that the IPO market for MedTech is pretty dried up and almost non-existent? Yeah, I would say yes. I largely do. I don't think it's completely closed. I think we did see Globus Medical, fast growing device company and the spine space go public not too long ago, and that's probably a six, seven-year. or old company that's experienced some tremendous growth and I think, you know, markets valuing it over a billion dollars and it's actually traded up since it's gone out. So that's at least a, I think, a sign of life on the device side. So I think for the right companies, the right profiles, there is still a market there. And frankly, I think, you know, we need to be building companies with both paths in mind.

You know, you can't build a company, at least it's our philosophy, you can't build a company just to be sold at a certain point of time because however well you try to plan that, you're almost definitely going to be wrong. So building a company to be standalone and potentially IPO at some point is actually probably the best way to find an M&A. The best companies are bought.

They're not sold. So we can come back to that throughout the course of conversation. But I think you're right. If you look at the numbers, exits are much more likely to be M&A than IPO. Gotcha. And to your point about Globus, I think at least maybe it would,

was this week or last week, I think Sunshine Heart was another company that actually went, that actually IPOed as well. I haven't really, I don't know much about Sunshine Heart and I haven't dug into that, but that's another interesting, you know, so maybe to your point, maybe we're seeing a little bit of a, a little bit of IPO action, but I don't want to spend too much time on the IPO versus MNA. M&A is obviously, we're seeing an uptick and activity there, but on the IPO front, you just mentioned building a company, maybe in essence, to go in both directions if that's possible. On the IPO side, are there certain, it's probably a tough question to answer, but are there certain things that would make an IPO, or a company a better IPO candidate

versus another? Yeah, you know, I think there it's kind of the old-fashioned recipe of you need a very, very strong management team. It starts with the people, obviously. You need a team at all, a full team at all levels. And, you know, you really need a growth story. You need a big market, you need, I think, to be a market leader and you need to be showing significant traction. So, you know, I think if you're not at, you need to be close to profitability and ramping up pretty quickly in a space where there's huge upside. So pretty simple ingredients, but I think that's what investors are going to look for. Sure. Okay. So let's dig into the, you know, the M&A front. Presuming that that's, you know, that's where most of the active, we both agree that that's probably were most

the activity is and that will most likely continue to rise. Where do, you know, when large strategic companies, the Boston Scientific, COVIDians, J&J, et cetera, Medtronic and so on and so on, these are obviously the big players that are acquiring some of this early stage technology. Where do you personally see the greatest opportunity for growth if I, you know, seeing it through the lens of an early stage med tech company? You move from a therapeutic area standpoint. Yeah, yeah, exactly.

you know it's it's it's tough to say we we see opportunities in a lot of different areas you know I think there's still going to be a lot of opportunity and interventional cardiology you're still seeing a lot of growth there you know we've been pretty bullish on on CNS space actually and I think there's still a huge opportunity in the norostim area and you know I think, even though we just talked about Globus, I think spine's been a little bit tougher, that

hasn't been tremendous growth, but obviously you can still build something special there as the Globus guys saw. So, you know, I think what we've been seeing primarily, I'd say, cardiovascular CNS and, you know, some, I guess, some interesting stuff happening in

the GI space as well. Okay. So if I'm a entrepreneur physician, and I I'm not just to throw out an idea. And I come to Polaris, not that this exact situation would happen. If I've got an idea, you're not necessarily making a determination based on whether or not that idea fits within your therapeutic biases. You're just looking at the idea, the market, et cetera, right?

Yeah, our style of investing tends to be, you know, we start with the entrepreneurs, is this someone with a track record? Is this someone that we want to take a bet on and be partners with? And then we look at the technology. Is this a special, highly differentiated, well-protected, potentially game-changing piece of technology? And then I think you, you know, you check the boxes. Generally these things are going after pretty large markets, and you look at all the other factors.

But we start our review with who are the people and how exciting does the technology gives. Sure. And I actually want to come back around and ask you about maybe some of your personal investment psychology, I guess, for lack of a better description. But going back to kind of an early stage med tech company, are there some major questions that they need to have answered before you begin to look at a potential exit through a merger and acquisition? Yeah, well, it's, you know, the answer to that is kind of the, I think the unfortunate state of device investing today. It's what everyone's kind of scratching their head about and figuring out if we can mix. And, you know, we look a little bit through the prism of contrasting med tech investing to other areas of health care and not healthcare.

So we're a diversified fund. And each investor here is a diversified portfolio. So we all look at biotech. We all look at med tech. We all look at health care services and other areas as well. and, you know, the most of the contrasting and comparing gets done between biotech and medtech. And I, you know, the sad state of affairs from med tech is that for an early stage company, you more than likely have to go through the increasingly high hurdles of getting technical proof of concept,

getting clinical proof of concept, taking out regulatory risk, getting onto the market, and then actually taking out commercial risk and reimbursement risk, showing that you can get this paid for and showing that you can build a business around it. And that's a very different profile from the biotech side where the traditional model has been, take out technical proof of concept and get some clinical proof of concept. And if you're in a big market, you know, if you build it, they will come. You have to build it much bigger, generally, on the device side and take it much further before a partner or an acquirer will show up.

And I think that's part of what makes early stage at tech investing, especially for something that's a PMA path or a heavy lifting 510K. So daunting right now is that it's a long road and there's not much help along the way, whereas on the biotech side, a lot of these companies have platforms, can generate multiple product opportunities,

can do some partnering along the way. There's more opportunities, I think, for non-volute funding. So I think this is getting into a bit of a different topic, but there may be a chance for MedTech to take a page out of the biotech book in terms of how you work with corporates, how you work with strategics, how you may do some partnering along the way. I think that's going to help the industry, everyone in the industry at the end of the day.

But to specifically answer your question, I think the unfortunate truth is that for most exits, if you look at the big exits recently in the vice space, they've been revenue stage companies that, you know, have had to prove out the commercial model before an acquirder shows up. Right. And I want to ask you about kind of derisking that investment from a, from the point of view of a large strategic. But before I ask that, are we in an era now where you, you know, as an early stage med tech company, you need to be extremely strategic or very good from a strategic standpoint in dealing with large strategics if you're looking to make an exit that in that path? Yeah, I think you do. I think you need to be a bunch of things. I think you need more than ever to be incredibly entrepreneurial. And maybe while we're taking pages out of other people's playbooks, I think net tech investors need to look at the software and digital media and the tech guys and see what they're able to build, essentially, you know, bootstrapped are an incredibly limited budget. And I think the early stage device entrepreneur, if there's a way, you know, that you can bootstrap a company, you know, through getting some, even some pre-quistrate.

clinical proof of concept or ideally, you know, figuring out a creative way to get some first demand data without having to raise a significant amount of money, then you put yourself in a far, far better position. So I think I may have gotten off track of your question, but maybe you can remind me with the... No, no, no, you were actually right on track. I mean, it's, it's, no, that's exactly what I was asking. I mean, if you're looking, you mentioned kind of the, the platform, I guess. And so in biotech, someone has that advantage, and maybe their platform is a little bit wider versus deeper. And so there may be other opportunities for a large strategic to acquire that technology and build upon that platform versus maybe kind of a single kind of vertical

niche, I guess, if that makes sense. Yeah. Yeah, and I apologize, and you were asking me about what can they do with corporates and strategics early on. I think, Um, you know, unfortunately for most device companies, um, you know, it does ultimately, if you start with an interesting broad technology, you pretty quickly narrow yourself down to a, you know, a single product or a, you know, a single, uh, application in that technology. Most device companies can't afford to be putting forward a bunch of products and, uh, kind of diversify risk that way. So, um, yeah, I think at the earliest stages, um, you want to be getting as much input from,

from corporates and strategics. And I think going and, you know, asking for advice on, you know, what's the type of data you want to see? What's the target product profile? What specs do you want to see? What kind of clinical design, et cetera, incredibly impactful at the early stages of the company. I think you'll find, you know,

most of the big device guys willing to give you that type of feedback and work with you along the way. So I think erring on the side of being a little bit more open with these guys and getting feedback as early as you can, And again, I think there's a huge opportunity to sit down and have all of us think creatively about, you know, how can we, how can small companies work with some of the larger ones in a way that becomes a win-win? And again, I think you're seeing a lot of new, interesting models on the biopharmist side where, not to get off track, but, you know, Big Farm is realizing that they just can't sit around and wait for assets that to show up at their door that are post-phase 2 or post-phase 3. they're realizing that there's an incredible, frankly, a financial crisis with early stage investing.

And they're actually rolling up their sleeves and getting involved early on and figuring out creative ways to partner with companies without ultimately limiting the fate or the upside for that company. So I think that's something that hasn't really seeped into the device world yet, but I'm hopeful that it will potentially. No, that's great information. And to your point, it seems like it's almost, you need,

you need that on the task list to check off that box is continuing to work early on with large strategics and not just from a potential, you know, M&A exit, but also from a, um, uh, from the standpoint of, you know, maybe there's a, maybe there's a different model other than an M&A that may eventually happen years down the row. But if you're, if you're, if your, if your communication is there early on, um, the options will be, uh, much more open, uh, for some, you know, some of those, some of those. Yeah. And these, at the end of the end of the day everyone knows acquisitions don't happen overnight you don't all of a sudden hit a you know a certain you don't hit cash flow break even or you know hit a certain reimbursement

milestone and then the you know the acquires show up it takes a lot of time uh to uh to get comfortable with the technology to get comfortable with a team to get comfortable with a particular business model and so you know starting that dialogue early and then going through that getting to know you phase uh and kind of drawing them in over time telling them this is what you're going to do and then going out and doing it then um you know at the right time you know at the right time, the transaction can be much smoother. Sure. Yeah.

And I want to ask you about one of your portfolio companies, and I think it's still in your portfolio, 480 biomedical. Is that still? Yeah, sure. Yeah. And I think that probably ties into my next question, because to answer the question, and we talked a little bit about this earlier, de-risking the investment for a large strategic, what, can you easily answer the question of, where do I place the most importance

on clinical data and what my trial looks like or, you know, sales and revenue. Is there an easy way to answer that question in terms of making this purchase look, making this purchase a lot easier for a company like J&J or Medtronic or BOPHs and Scientific, etc. Hey there, it's Scott, and thanks for listening in so far. The rest of this conversation is only available via our private podcast for MedSider Premium members. If you're not a premium member yet, you should definitely consider signing up.

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